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The problem: Consumers pay too much for auto
insurance and, if theyre badly hurt, get
far too little. In California, for example,
consumers pay something like $7 billion for
the "people" portion of auto insurance
(auto theft and damage are additional). But if
theyre badly hurt  $100,000 or more in
medical expenses and lost wages  they recoup
on average just 9% of their actual losses from that
$7 billion pool. Imagine your $200,000 house
burning down and recouping just 9%  $18,000
 from your insurance company, after paying
high premiums all those years.

So where does all the money go? In California, more
than half goes to lawyers (both yours, fighting
for your claim, and the insurance companys
lawyer, fighting against it) and to fraud. Why so
much fraud? Because the current system actually
encourages people  even normally honest
people  to strike back at the insurance
companies and recoup some of those years and years
of exorbitant premiums by saying their necks hurt
when they dont, or exaggerating their injuries.

In Michigan  the one state that does this almost
right  there are 7 fakeable claims (e.g.,
whiplash) for every 10 unfakeable ones (e.g.,
a broken arm). But theyre probably not fake,
because theres no incentive to fake them. Neither
are they likely underreported, either,
because if your neck really hurts, why wouldnt you
tell your doctor and try to get the pain to stop?

In California, by contrast, there are not 7 fakeable
claims (e.g., whiplash) for every 10 unfakeable
ones, as in Michigan  there are 25! The extra
18 are presumably fraudulent, but the insurance
companies cant tell which they are ... so they
pay them, and the cost of that fraud is added to the
cost for everyone else. But, perhaps understandably,
they pay them grudgingly and with suspicion (because
they realize theres a good chance theyre
being conned), which means that they treat
everybody badly, including the "7"
of those 25 who deserve real sympathy and support.

Could people and lawyers and chiropractors really
misuse the system so starkly?

You bet. In Massachusetts, when its
first-in-the-nation "no-fault" bill was
passed in 1971, you could only sue for pain and
suffering if you had medical bills and lost wages
of $500 or more. But people quickly learned to
treat that $500 not as a threshold but as a target.
(How hard is it to rack up $500 in medical bills?)
Then in 1988, to try to rein in the lawsuits, the
target  sorry, I mean the "threshold"
 was raised from $500 to $2,000. The next
year, the average number of doctors and
chiropractors visits after an auto accident
jumped from 13 to 30. So, yes, people do game
the system. The "no-fault" the lawyers
like to discredit as not having worked largely
hasnt  because the lawyers, way back when,
saw to it that there would be these low
"thresholds" above which the old lawsuit
system took over. In short, they sabotaged it. Only
in Michigan did a "real" no-fault system
squeak past the personal injury bar ... and it has
been working well for 25 years.

In most states, more money goes to lawyers after an
auto accident, on average, than to doctors and
hospitals and nurses and chiropractors and
rehabilitation expenses combined.

Auto insurance in every state except Michigan is,
to a greater or lesser extent, terrible And even
Michigan has a flaw. (Yes, its significantly
cheaper than in California; and yes, the compensation
you can expect to receive is closer to 90% than 9%.
Yes, relatively little of your premium goes to
legal expenses and fraud, because you can sue only
in the most severe cases. But the flaw is: If you
cant afford to buy it, you are not entitled to
the benefits. Michigan needs to allow low-income
drivers to buy a less generous, more affordable
benefit package.)

Why dont all states just follow Michigans
example (with that one tweak to accommodate low-income
drivers)? After all, its worked for 25 years.
People pay less, yet get vastly better protection
against severe injury. Consumers Union long called
for just such reform.

Because the lawyers wont allow it. In
California, the lawyers take about $2.5 billion
a year from that $7 billion pool. They have
shown they will do virtually anything to keep
from letting go of it. They will certainly lie and
defraud the public  and the public, in such
situations, has no real recourse.

(Most insurance companies arent keen on a system
of lower premiums, either. Only the mutual companies,
owned by their policyholders, support no-fault.)

In an ideal system, a good chunk of the premium
would be blended into the price of gas and collected
automatically. That would eliminate sales costs,
end the uninsured motorist problem (nearly half the
accident causers in California drive uninsured),
and  well I wrote a whole little book about
how this could actually be a fairer system than
today. (Bad drivers would still pay more.) But the
nations insurance agents and insurance companies
and oil companies are simply not going to allow
pay-at-the-pump ... so let us, reluctantly, put it
aside in our discussion. Though it would help,
the really big gains to be had in auto insurance
reform come from eliminating the incentive to fake
and exaggerate claims and the need for lawsuits
 namely, from adopting Michigan-style
no-fault insurance.

But, as I say, the lawyers wont allow it.
Theyre probably still kicking themselves that a
coalition of labor unions, consumer groups, and
others managed to get this passed in Michigan in
1973. (Michigan, by the way, is a place that
ought to know something about automobiles.)

Herewith, the personal-injury lawyers
suggestion for fixing the problem: Blame it on
the insurance companies. No system is
acceptable to them that merely helps the victims,
a la Michigan. The lawyers must be paid. It is
their right. Michigan may compensate the badly
injured far better, and it may cost consumers less
but is only secondarily of concern to personal
injury lawyers. Of primary concern are their
legal fees. And under the Michigan system, these
are cut way, way back. So thats unacceptable.

Tomorrow, I will describe the defense
attorneys prescriptions for reform. They
dont make as much from the current system as
the personal injury attorneys, but nationwide it
still amounts to billions of dollars a year.